How do organizations assign power and authority? How do organizations assign tasks and functions? How do organizations assign resources and personnel? What is the correlation between organizational structure and strategy? Does structure determine strategy or does strategy determine structure? The answers to these strategic questions are critical to the formulation of effective organizational strategy and optimal differentiation-horizontal and vertical that allows organizations to create and sustain competitive advantage in the global marketplace.
In this review, we examine some pertinent and extant academic literature on effective organizational strategy and optimal organizational differentiation that facilitate and sustain competitive advantage in the global marketplace. As noted in the relevant academic literature, organization’s strategy is its plan for the whole business that sets out how the organization will use its resources-tangible and intangible to accomplish stated goals and objectives while organization’s structure is the way the units of an organization are integrated internally. Organizational structure also describes the connections with its external environment-corporate publics, and planned outcomes. For an organization to execute its plans efficiently and effectively, the strategy and the structure must be internally consistent and integrated seamlessly.
Further, organizational design is a formalized process of integrating people, resource, strategic and operational intelligence, and technology across an organization while organizational structure addresses the questions: Who does what and who reports to whom? Indeed, organizational structure is the formal distribution of power, authority, and roles in an organization designed to achieve goals efficiently and effectively while organizational behavior is the study of the way people interact within groups. The study of organizational behavior is designed to create more efficient and effective organizations. The central idea of the study of organizational behavior is that a scientific approach can be applied to the management of power, authority, tasks, processes, employees and responsibilities.
In the extant academic literature, differentiation is the series of processes that organization uses to assign power, authority, resources-tangible and intangible and employees to achieve its strategic and operational goals. The processes of differentiation determine the relationships between managers and employees. Horizontal differentiation occurs as managers and employees receive their assignments for various tasks and vertical differentiation describes assignment of power and authority within an organization.
As first postulated in Exodus, Jethro differentiation: Vertical differentiation is the process of allocating power and authority while horizontal differentiation is the process of allocating tasks and functions within an organization. The process of horizontal differentiation begins with delegation of specialized tasks to employees. This form of differentiation averts an organization from having only one employee or a few employees assigned to carry out multiple tasks. The process also allows the organization’s managers and employees to specialize and stay within tasks related to their field of expertise.
The process of vertical differentiation involves the establishment of a “chain of command” among employees and managers. Vertical differentiation segregates management into strategic, executive and transactional while horizontal differentiation segregates employees into functional areas: Operations; research and development; accounting and finance; marketing and sales; and human capital management.
Some Operational Guidance
In practice, while organizational structure focuses on the entire organization, strategy formulation and implementation involves assigning individuals to tasks and timelines that will help an organization reach its stated goals and objectives. A well-designed organizational structure can streamline operations, improve decision-making, facilitate employees’ cooperation, collaboration and performance. Efficient and effective strategy formulation and implementation requires a good fit between organizational strategy and structure.
Differentiation and Integration
Generally, organizations use differentiating mechanism to assign employees to different tasks and functions while integrating mechanism is used to coordinate different units and employees to ensure that everyone is working toward efficient and effective accomplishment of organizational goals and objectives.
When an organization effectively bring its different units together under a visionary leader or coordinated strategic direction, an organization is said to be well-integrated. Integration leads to a unified and cohesive organizational structure. Successful organization selects between differentiated and integrated organizational structure depending on industry structure-degree of competition, stage of industry life cycle, its competitive position, leadership and resources-tangible and intangible.
There is substantive and gathering empirical evidence in the relevant academic literature suggesting that successful organizations tend to be more differentiated and integrated than less successful organizations. As organizations grow, they evolve and differentiate into more and more functional areas: Operations; research and development; accounting and finance; marketing and sales; and human capital management.
Structure and Strategy
Organizational structure improves strategic and operational efficiency by providing clarity to employees at all levels of an organization. Efficient and effective organizational structure encourages collaboration and facilitate performance of functional areas of an organization by focusing time and energy on productive tasks. In addition, well-designed organizational structure plays an important role in strategy formulation and implementation. Therefore, organizational structure is critical to an organization’s success, addressing the who, what, when, where, why, and how of reaching desired goals and objectives. Moreover, organizational structure determines how power, authority, resources, roles and responsibilities are planned, coordinated, controlled, and assigned, and how information flows among the different levels of organizational management: Strategic, executive and transactional.
Finally, successful organizations implement strategic coordination among its various units to leverage synergistic opportunities inherent in any strategy. Indeed, to out-perform their competitors, successful organizations must design appropriate structure and formulate optimal strategy that maximize its profit or benefit producing capacity while minimizing the cost of operations simultaneously.
In sum, a well-designed organizational structure that is properly aligned with organizational strategy is required to create and sustain competitive advantage in the global marketplace. Whether organizational strategy is shaped by industry structure as posited by structuralists or industry structure is reconstructed by organizational strategy as postulated by reconstructionists, the most critical requirement is an effective alignment of organizational strategy and structure, ceteris paribus.